Theory Of Firms Flashcards
Monopoly market share
25%
Concentration ratio
The percentage of market share taken up by the largest firms
Eg 3 firm concentration ratio is 75%
Normal profit
The minimum profit required to keep factors of production in their current use in the long run
Abnormal/super normal
Profit achieved in excess of normal profit
Subnormal profit
This is profit which is less than normal
P<average cost
Perfect competition assumptions
Large number of firms
Product homogenous
Low barriers to enter/exit
Price takers
Perfect knowledge for both
Short run loss minimisation (perfect comp)
If price below costs shift S because firms will leave market
If losing money in the short run businesses will continue as long as they can cover variable costs
Long term returns to normal profit
Long run (perfect comp) if making a loss
If making loss in long run firms will leave market. No barriers to exit
This means reduction in supply so price rises
Always return to normal profit
Long run super normal profit (perfect comp)
Return to long term equilibrium as firms enter supply shifts right and price reduced
Monopoly
One firm
Products vary
Barriers to enter and exit
Price maker
Imperfect knowledge
Monopolistic competition (elastic)
Large number of firms
Some element of control over price due to differentiated produce
Products close but not perfect are substitutes
Low barriers to entry and exit
Imperfect knoweledge
Price maker
Advantages of monopoly
Economies of scale
R&D reinvest
Price discrimination
The practice of charging different price for some goods/services
First degree price discrimination
Different price for every unit consumed
Second degree
Different price for different quantities
Third degree price discrimination
Different price to different consumer
Conditions for price discrimination
Different markets
Each segment has different elasticities
Markets kept separate (no seepage)
Natural monopoly
When the most efficient number of firms in the industry is one
Oligopoly
Competition between the few
May be a large number of firms in the industry but is dominated by a small number of large producers
Features of an oligopolistic market structure
Price stable across the industry (kinked demand)
Potential for collusion
Goods homogenous or highly differentiated
Brand loyalty
Non price competition
Game theory
High barriers to entry
Contestable market
Where an entrant has access to all production techniques available to incumbents (already in market) and entry decisions can be reversed without costs
Contestable market features
Firms behaviour affected by threat of new entrants
No barriers to entry or exit
No sunk costs
Firms may make artificial barriers to entry or limit profits to stop new entrants
When do markets become conestable
Over capacity
Aggressive marketing
Find ways of reducing costs and increasing efficiency
Potential for predatory or destroyer pricing
Hit and run (contestable market tactic)
Enter industry take profit and leave
(No barriers to entry or exit)
Cream skimming (contestable market tactic)
Identifying parts of the market that are high in value added and exploiting those markets
Monopsony
When a single buyer controls the market for a particular good or service
Monopsony power
Buying or bargaining power
Monopsony can exploit their bargaining power
Evaluating the economic welfare effects of monopsony power in markets
Improved value for money
Producer surplus
Evaluating monopolistic competition
Not allocatively efficient- price doesn’t equal marginal cost
Not Productively efficient- many firms not allowing for economies of scale
Dynamic- competition brings motivation for product innovation
